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entitled 'Federal Reserve Banks: Areas for Improvement in Information
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GAO-11-447R:
United States Government Accountability Office:
Washington, DC 20548:
March 31, 2011:
Stephen R. Malphrus:
Staff Director for Management:
Board of Governors of the Federal Reserve System:
Subject: Federal Reserve Banks: Areas for Improvement in Information
Systems Controls:
Dear Mr. Malphrus:
In connection with fulfilling our requirement to audit the financial
statements of the U.S. government,[Footnote 1] we audited and reported
on the Schedules of Federal Debt Managed by the Bureau of the Public
Debt (BPD) for the fiscal years ended September 30, 2010 and 2009.
[Footnote 2] As part of these audits, we performed a review of
information systems controls over key financial systems maintained and
operated by the Federal Reserve Banks (FRB) on behalf of the
Department of the Treasury's (Treasury) BPD relevant to the Schedule
of Federal Debt.
As we reported in connection with our audit of the Schedules of
Federal Debt for the fiscal years ended September 30, 2010 and 2009,
we concluded that BPD maintained, in all material respects, effective
internal control over financial reporting relevant to the Schedule of
Federal Debt as of September 30, 2010, that provided reasonable
assurance that misstatements, losses, or noncompliance material in
relation to the Schedule of Federal Debt would be prevented, or
detected and corrected on a timely basis. However, we identified
information systems deficiencies affecting internal control over
financial reporting, which, while we do not consider them to be
collectively either a material weakness or significant deficiency,
nevertheless warrant FRB management's attention and action.[Footnote 3]
This report presents a control deficiency we identified during our
fiscal year 2010 testing of information systems controls over key
financial systems maintained and operated by the FRBs relevant to
BPD's Schedule of Federal Debt. This report also includes the results
of our follow-up on the status of FRB's corrective actions to address
information systems control-related recommendations contained in our
prior years' reports and open as of September 30, 2009. In a
separately issued Limited Official Use Only report, we communicated
detailed information regarding our findings to FRB management.
Results in Brief:
Our fiscal year 2010 audit procedures identified one new general
information systems control deficiency related to access controls. We
made one recommendation to address this control deficiency.
The new information systems control deficiency we identified did not
represent a significant risk to the key financial systems maintained
and operated by the FRBs on behalf of BPD. The potential effect of
such a control deficiency on financial reporting relevant to the
Schedule of Federal Debt was mitigated by FRB's physical security
measures and a program of monitoring user and system activity, and
BPD's compensating management and reconciliation controls designed to
detect potential misstatements in the Schedule of Federal Debt.
In addition, during our fiscal year 2010 follow-up on the status of
FRB's corrective actions to address eight open recommendations related
to general information systems control deficiencies identified in our
prior years' audits, we determined that as of September 30, 2010,
corrective action on six of the eight recommendations was completed,
while corrective action was in progress on the two remaining open
recommendations related to security management and access controls.
The Director of Reserve Bank Operations and Payments Systems on behalf
of the Board of Governors of the Federal Reserve System provided
comments on the detailed findings and recommendations in the
separately issued Limited Official Use Only report. In those comments,
the Director of Reserve Bank Operations and Payment Systems stated
that the agency takes control deficiencies, and actions to address
them, seriously. The Director further commented that the new
deficiency has already been addressed, and that the remainder have
corrective actions planned or in progress.
Background:
Many of the FRBs provide fiscal agent services on behalf of BPD. Such
services primarily consist of issuing, servicing, and redeeming
Treasury securities held by the public and handling the related
transfers of funds. In fiscal year 2010, the FRBs issued about $8.4
trillion in federal debt securities to the public, redeemed about $6.9
trillion of debt held by the public, and processed about $183 billion
in interest payments on debt held by the public. FRBs use a number of
key financial systems to process debt-related transactions. The
Federal Reserve Information Technology Computing Centers maintain and
operate key financial systems to process and reconcile funds disbursed
and collected on behalf of BPD. Detailed data initially processed at
the FRBs are summarized and then forwarded electronically to BPD's
data center for matching, verification, and posting to the general
ledger.
Section 3544(a)(1)(A) of Title 44, United States Code, delineates
federal agency responsibilities for (1) information collected or
maintained by or on behalf of an agency and (2) information systems
used or operated by an agency or by a contractor of an agency or other
organization on behalf of an agency. Further, section 3544(b) provides
that each agency shall develop, document, and implement an agencywide
information security program to provide information security for the
information and information systems that support the operations and
assets of the agency, including those provided or managed by another
agency, contractor, or other source. Office of Management and Budget
Memorandum M-10-15, FY 2010 Reporting Instructions for the Federal
Information Security Management Act and Agency Privacy Management,
clarified that agency information security programs apply to all
organizations that possess or use federal information--or that
operate, use, or have access to federal information systems--on behalf
of a federal agency. In addition, section 3544(a)(1)(B) of Title 44,
United States Code, requires federal agencies to comply with
information security standards developed by the National Institute of
Standards and Technology.
Objectives, Scope, and Methodology:
Our objectives were to evaluate information systems controls over key
financial management systems maintained and operated by the FRBs on
behalf of BPD that are relevant to the Schedule of Federal Debt, and
to determine the status of FRB's corrective actions to address
information systems control-related recommendations contained in our
prior years' reports for which actions were not complete as of
September 30, 2009. Our evaluation of information systems controls was
conducted using the Federal Information System Controls Audit Manual
(FISCAM).[Footnote 4]
To evaluate information systems controls, we identified and reviewed
FRB's information systems control policies and procedures, observed
controls in operation, conducted tests of controls, and held
discussions with officials at selected FRB data centers to determine
whether controls were adequately designed, implemented, and operating
effectively.
The scope of our general information systems controls work for fiscal
year 2010 included (1) following up on open recommendations from our
prior years' reports and (2) using a risk-based approach to testing
the five FISCAM general control areas related to the systems in which
the applications operate and other critical control points in the
systems or networks that could impact the effectiveness of the
information systems controls at the relevant FRB in the current year.
In addition, we performed security configuration reviews of key
Federal Reserve technical infrastructure components supporting the key
FRB systems. We also reviewed results of security testing performed by
FRB Richmond General Audit relevant to our fiscal year 2010 audit.
We determined whether relevant application controls were appropriately
designed and implemented, and then performed tests to determine
whether the application controls were operating effectively. We
reviewed four key FRB applications to determine whether the
application controls were designed and operating effectively to
provide reasonable assurance that:
* all transactions that occurred were input into the system, accepted
for processing, processed once and only once by the system, and
properly included in output;
* transactions were properly recorded in the proper period, key data
elements input for transactions were accurate, data elements were
processed accurately by applications that produce reliable results,
and output was accurate;
* all recorded transactions actually occurred, related to the
organization, and were properly approved in accordance with
management's authorization, and output contained only valid data;
* application data and reports and other output were protected against
unauthorized access; and:
* application data and reports and other relevant business information
were readily available to users when needed.
The independent public accounting (IPA) firm of Cotton and Company LLP
evaluated and tested certain FRB information systems controls,
including the follow-up on the status of FRB's corrective actions
during fiscal year 2010 to address open recommendations from our prior
years' reports. We agreed on the scope of the audit work, monitored
the IPA firm's progress, and reviewed the related audit documentation
to determine that the firm's findings were adequately supported.
During the course of our work, we communicated our findings to the
Board of Governors of the Federal Reserve System. We plan to follow up
to determine the status of corrective actions taken for matters open
as of September 30, 2010, during our audit of the fiscal year 2011
Schedule of Federal Debt.
We performed our work at the FRB locations where the operations of the
systems we reviewed are supported. Our work was performed from
February 2010 through October 2010 in accordance with U.S. generally
accepted government auditing standards. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the
evidence obtained provided a reasonable basis for our findings and
conclusions based on our audit objectives.
As noted above, we obtained agency comments on the detailed findings
and recommendations in a draft of the separately issued Limited
Official Use Only report. The Board of Governors of the Federal
Reserve System's comments are summarized in the Agency Comments and
Our Evaluation section of this report.
Assessment of FRB's Information Systems Controls:
General information systems controls are the structure, policies, and
procedures that apply to an entity's overall computer operations.
General information systems controls establish the environment in
which application systems and controls operate. They include security
management, access controls, configuration management, segregation of
duties, and contingency planning. An effective general information
systems control environment (1) provides a framework and continuing
cycle of activity for managing risk, developing security policies,
assigning responsibilities, and monitoring the adequacy of the
entity's computer-related controls to ensure that an adequate security
management program is in place; (2) limits or detects access to
computer resources (data, programs, equipment, and facilities),
thereby protecting them against unauthorized modification, loss, and
disclosure; (3) prevents unauthorized changes to information system
resources (for example, software programs and hardware configurations)
and provides reasonable assurance that systems are configured and
operating securely and as intended; (4) includes policies, procedures,
and an organizational structure to manage who can control key aspects
of computer-related operations; and (5) protects critical and
sensitive data, and provides for critical operations to continue
without disruption or be promptly resumed when unexpected events occur.
During our fiscal year 2010 testing, we identified an opportunity to
strengthen certain information systems controls that support key
financial systems maintained and operated by the FRBs relevant to
BPD's Schedule of Federal Debt. Specifically, we identified one new
general information systems control deficiency related to access
controls.
Access controls are important because they limit access or detect
inappropriate access to computer resources (data, equipment, and
facilities), thereby protecting them from unauthorized modification,
loss, and disclosure. Such controls include logical access controls
and physical access controls. The new access control deficiency we
identified during fiscal year 2010 related to logical access controls.
Logical access controls require users to authenticate themselves
through the use of passwords or other identifiers, and limit the files
and other resources that authenticated users can access and the
actions that they can execute based on a valid need that is determined
by assigned official duties.
In a separately issued Limited Official Use Only report, we
communicated detailed information regarding our one new finding to FRB
management and made one detailed recommendation.
In addition, our fiscal year 2010 follow-up on the status of actions
taken to address unresolved general information systems control
deficiencies we identified in our prior years' audits for which
actions were not complete as of September 30, 2009, found that FRB
completed corrective actions on six of the eight open recommendations,
while corrective action was in progress on the two remaining open
recommendations related to security management and access controls.
Although FRB management has made progress in addressing the remaining
two general information systems control deficiencies, additional
actions are needed.
None of the control deficiencies we identified represented significant
risks to the financial systems maintained and operated by the FRBs on
behalf of BPD. The potential effect of such control deficiencies on
financial reporting relevant to the Schedule of Federal Debt was
mitigated by FRB's physical security measures and a program of
monitoring user and system activity, and BPD's compensating management
and reconciliation controls designed to detect potential misstatements
in the Schedule of Federal Debt. Nevertheless, these deficiencies
warrant management's attention and action to limit the risk of
unauthorized access, loss, or disclosure; modification of sensitive
data and programs; and disruption of critical operations.
Conclusion:
FRB has made significant progress in addressing the open information
systems control recommendations from our prior years' audits, and
while actions are still needed in two control areas, it has corrective
actions under way or planned. Our fiscal year 2010 audit also
identified one new general information systems control deficiency
related to access controls.
Recommendation for Executive Action:
We recommend that the Director of Reserve Bank Operations and Payment
Systems direct the appropriate FRB officials to implement the new
detailed recommendation presented in the separately issued Limited
Official Use Only report.
Agency Comments and Our Evaluation:
The Director of Reserve Bank Operations and Payments Systems on behalf
of the Board of Governors of the Federal Reserve System provided
comments on the detailed findings and recommendations in the
separately issued Limited Official Use Only report. In those comments,
the Director of Reserve Bank Operations and Payment Systems stated
that the agency takes control deficiencies, and actions to address
them, seriously. Specifically, the Director commented that the new
deficiency has already been addressed, and that corrective actions for
the two remaining open recommendations from our prior years' reports
are planned or in progress. The Director also stated that the FRBs
intend to implement corrective actions for one of the two remaining
findings by June 2011, and actions to address the other finding by
September 2012 as part of a transition to a new information security
program. We plan to follow up to determine the status of corrective
actions taken for these matters during our audit of the fiscal year
2011 Schedule of Federal Debt.
In the separately issued Limited Official Use Only report, we
requested a written statement on actions taken to address our
recommendations not later than 60 days after the date of that report.
We are sending copies of this report to interested congressional
committees, the Chairman of the Board of Governors of the Federal
Reserve System, the Fiscal Assistant Secretary of the Treasury, and
the Director of the Office of Management and Budget. This report also
is available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you have any questions regarding this report, please contact me at
(202) 512-3406 or engelg@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report include Jeffrey L. Knott and Dawn B. Simpson, Assistant
Directors; Edmund F. Fernandez; and George C. Kovachick.
Sincerely yours,
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
[End of section]
Footnotes:
[1] 31 U.S.C. § 331(e)(2). As a bureau within the Department of the
Treasury, federal debt and related activity and balances are also
significant to the consolidated financial statements of the Department
of the Treasury (see 31 U.S.C. § 3515(b)).
[2] GAO, Financial Audit: Bureau of the Public Debt's Fiscal Years
2010 and 2009 Schedules of Federal Debt, [hyperlink,
http://www.gao.gov/products/GAO-11-52] (Washington, D.C.: Nov. 8,
2010).
[3] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis. A significant deficiency is a deficiency, or combination
of deficiencies, in internal control that is less severe than a
material weakness, yet important enough to merit attention by those
charged with governance. A deficiency in internal control exists when
the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned
functions, to prevent, or detect and correct, misstatements on a
timely basis.
[4] GAO, Federal Information System Controls Audit Manual, [hyperlink,
http://www.gao.gov/products/GAO-09-232G] (Washington, D.C.: February
2009).
[End of section]
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